Costa Rica and CAF sign US$500-million financing agreement

Costa Rica,
May 24, 2019

The loan will allow for better management of debt and financing needs, and does not entail expense or indebtedness over the 2019 budget. The funding will help relieve pressure on Costa Rica’s domestic market, with the nation increasing its shareholding in CAF as a way to strengthen their relationship.

In order to ensure long-term fiscal sustainability by improving the management of the tax system and greater public spending discipline, representatives of the Costa Rican government and CAF—development bank of Latin America— signed on Friday a $500-million loan agreement.

The agreement was signed by the Minister of Finance, Rocío Aguilar and CAF executive president, Luis Carranza, with the President of the Republic, Carlos Alvarado, as witness, who emphasized the need for the nation to redirect its efforts to stabilize the fiscal and financial situation.

“Last year, we managed to implement a reform, and it was not easy, but the government is clear about what we need to do to ensure financial sustainability of our nation, and this agreement with CAF supports this work and we hope it will continue to do so in the future,” said the president.

The funding will support the Ministry of Finance in the process to enforce the law on Strengthening of Public Finance (No. 9635) on public policy, which has a term of 18 years from the date of entry into force of the loan agreement including a three-year grace period, and to be paid over 15 years.

“We are a strategic partner of our member countries and we provide support in their development processes, e.g. through the program to strengthen public finance in Costa Rica, which allows the nation to ensure fiscal sustainability in the long term. In addition, we are pleased to sign agreements for actions so that Costa Rica makes progress in its process of becoming a full member of CAF and can access more long-term financial resources, as well as technical cooperation and knowledge to drive sustainable development of the nation,” said Luis Carranza, CAF executive president.

These funds are part of the government’s financing strategy and will be used to meet the needs established in the 2019 budget. In addition, the terms of the agreement relieve the pressure on the domestic market, which could have a positive effect on the behavior of local interest rates.

“We appreciate CAF’s trust in our debt management. This budgetary support operation will allow us to reduce the pressure of interest rates on the domestic market, and the loan does not entail expenses larger than that established in the 2019 budget, or more indebtedness, but will allow for better debt management, by replacing some funding sources that involve a higher cost, with a more favorable source that will help us reduce the issue of securities in the domestic market,” highlighted the head of the Treasury.

Aguilar emphasized that while the signing of this agreement contributes significantly to our financing strategy, the government shall continue making the necessary efforts to pass the Eurobonds Act, in order to give greater continuity and robustness to this strategy in the medium and long term, while strengthening the domestic market.

Once signed, this loan shall be sent to the Legislative Assembly for approval, after which CAF will disburse the funds.

Financial conditions of the loan

Interest rate

6-month Libor annual rate plus a 1.85% margin.

Term of the loan

18 years, counted from the date of entry into force of the loan agreement

Grace period

3 years

Payment period

15 years

Commitment Fee

0.35% per year on undisbursed balances

Financing Fee

0.85% of the loan amount, one-time payment

Assessment expense

US$25,000

Source: General Directorate of Public Credit, Ministry of Finance.

During the activity, an Equity Agreement was also signed, which will allow the nation to advance in the process of becoming a full-fledged member of CAF, thus accessing more long-term financial resources, as well as technical cooperation funds and knowledge management for both public and private sectors.

CAF—development bank of Latin America—is a multilateral financial institution recognized internationally for its history and impact for almost 50 years working for sustainable development and a better quality of life for all Latin Americans. CAF reaffirmed its commitment to sustainable development in Costa Rica, by providing the nation with financial products, technical cooperation and tools to generate knowledge in strategic areas for national development, such as public-private partnerships, microfinance, financial inclusion, tax collection and territorial development, among others.